Long-Term Buy List Review

3/12/2012


Long-Term Buy List review

Some investors prefer to own stocks with household names. They expect to hold stocks for more than a year and are willing to accept less explosiveness in return for a higher comfort level with the companies. Our Long-Term Buy List was created for such investors. Long-Term Buys may not be especially cheap or may lack a near-term growth catalyst. But all have the potential for substantial outperformance over the next two to four years.

If you invest to track our Buy List or Focus List, which feature stocks selected for their 12-month potential, you should sell when we drop a stock from those lists, even if the stock remains a Long-Term Buy. But any stock we rate a Long-Term Buy still has appeal for investors looking out two or more years. This week, we are removing Hewlett-Packard ($24; HPQ) from the Long-Term Buy List and adding Jabil Circuit ($25; JBL), already rated Buy. Jabil, reviewed in Analysts' Choice, is a little small for the Long-Term Buy List but has solid prospects and a strong market position. In the following paragraphs, we review four other Long-Term Buys.

CSX ($20; CSX) fell short of the consensus in the December quarter, and profit estimates for 2012 and 2013 are trending lower. The railroad's Quadrix Overall score has dipped to 71, dragged down by weaker operating momentum, falling profit estimates, and disappointing price action. However, CSX's ability to raise prices offers a reason for optimism. In the December quarter, revenue rose 5% despite a 4% decline in shipment volume (coal volumes fell 8%). The company expects 2012 volumes will rise faster than the economy despite continued weakness in coal.

The consensus projects per-share-profit growth of 11% this year and 14% next year on mid-single-digit sales growth, targets CSX seems capable of exceeding. That solid growth comes cheap. At 12 times trailing earnings, CSX sports a 19% discount to its three-year average. CSX shares, rated Long-Term Buy, should reward patient investors.


IBM ($197; IBM) shares hit an all-time high in early March. But its Overall score has sunk to 66, dragged down by subpar ranks for Momentum, Value, and Earnings Estimates. Still, the company enjoys a robust growth outlook as it expands further into business analytics and cloud-computing services.

IBM expects to boost per-share earnings by more than 10% to at least $14.85 in 2012. IBM also sees annual profits reaching $20 per share by 2015, implying annualized growth of 11%. More importantly, management has proven that it can deliver on its promises, topping the consensus profit estimate in each of the last four quarters. IBM remains a Long-Term Buy.


St. Jude Medical's ($40; STJ) revenue growth slowed to 4% in the December quarter, hurt by product missteps and weakness in the cardiac-rhythm-management business. Meanwhile, pricing pressures and concerns regarding reimbursements weigh on the shares, and the company took a $56 million charge after failing to receive payment from a distributor based in Greece. The Quadrix Overall score now stands at just 70.

Despite St. Jude's woes, the company is setting the table for growth by developing products that should accelerate sales and increase market share in coming years. The consensus projects per-share-profit growth of 6% this year and next year, targets that sound unduly conservative. The shares are cheap, trading at 13 times trailing earnings, a 21% discount to their five-year average and well below the 10-year average P/E of 25. St. Jude is a Long-Term Buy.


Preparing to open its first store in Los Angeles, Wal-Mart Stores ($59; WMT) continues to push into U.S. urban centers. Higher foot traffic helped U.S. same-store sales rise for a second consecutive quarter, while total sales rose 6% and same-store sales excluding fuel increased 0.9% in the year ended January. But promotional activity is taking its toll. Net profit margins are declining, and net income excluding special items rose just 2.7% in the year ended January, the lowest in 15 years.

Still, the consensus projects profit growth of 8% this year and next year. Wal-Mart shares, up 11% in 2011, have traded roughly sideways so far this year and still look attractive at 13 times trailing earnings, a discount of 18% to the median general-merchandise retailer. Earlier this month, Wal-Mart raised its quarterly dividend 9%, payable April 4. The stock is a Long-Term Buy.

Hewlett-Packard downgraded

We are removing Hewlett-Packard ($24; HPQ) from our Long-Term Buy List. Its Quadrix scores have deteriorated in the last few months, and now only two of the six category scores — Quality and Value — exceed 30. H-P faces serious long-term problems in its printer and personal-computer businesses, and the company is barely clearing lower bars that management sets for itself. We expected a challenging January quarter, but H-P's tepid guidance pushes a potential recovery further into the future than we had anticipated. The stock's cheap valuation — share trade at less than six times trailing earnings, 48% below their three-year average — is not enough to drive us to wait for a turnaround. H-P is being dropped from the Buy List and is now rated B (average).

DISH ruling delayed

Last year, DISH Network ($30; DISH) acquired about $3 billion of wireless spectrum. But regulators have delayed their decision on a waiver that would allow DISH to use the spectrum for a strictly ground-based network, rather than one combining both satellite and terrestrial services. A ruling could come by the end of the year, and analysts still expect the Federal Communications Commission to grant the waiver. But DISH Chairman Charlie Ergen has said he would consider selling the spectrum if he met any regulatory delays. The spectrum crunch is becoming apparent at AT&T ($31; T), which has struggled to manage congestion on its network. DISH is a Buy and a Long-Term Buy. AT&T is rated C (below average).

News digest

Seeking to collect their $18 billion award against Chevron ($109; CVX), lawyers for Ecuadorean plaintiffs have begun the arduous task of trying to convince other countries where the energy giant operates to recognize the ruling's validity. The lawyers said they might first target Chevron assets held in Venezuela and Panama. Chevron has asked Ecuador's Supreme Court to overturn the ruling. Chevron is a Focus List Buy and a Long-Term Buy.


Apple ($530; AAPL) unveiled the iPad 3, equipped with Siri voice-recognition technology, a faster processor, sharper display, and the ability to run on fourth-generation networks. The company also showed off its latest Apple TV set-top box. Both devices go on sale March 16. Apple is a Focus List Buy and a Long-Term Buy.


Macy's ($37; M) said same-store sales rose 4.6% in February, exceeding the consensus estimate of 3.5%. For the two months ending April, management expects sales at stores open at least one year to climb 3% to 3.5%. Macy's is a Buy and a Long-Term Buy.


After the payment of a quarterly dividend of $0.215 per share on March 23, Qualcomm's ($62; QCOM) next dividend will be $0.25 per share, up 16%. The company also approved $4 billion in share buybacks. Qualcomm is a Focus List Buy and a Long-Term Buy.


The European Union said privacy-policy changes made by Google ($605; GOOG) fail to conform to European data-protection rules. Google proceeded with the changes despite officials' requests to postpone implementation. Google is a Long-Term Buy.


BP ($46; BP) agreed to pay about $7.8 billion to settle with businesses hurt by the 2010 oil spill in the Gulf of Mexico. BP still faces federal and state claims that could amount to billions of dollars more. BP is rated B (average).

Rank Changes

Jabil Circuit ($25; JBL), already a Buy, is being added to the Long-Term Buy List. Hewlett-Packard ($24; HPQ) is being dropped from the Long-Term Buy List.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com